Corp Gov UAE Corporate Governance

Corp Gov UAE

Corporate Governance at Etisalat and the UAE at Large

Corporate Governance in the UAE: An Overview

Corporate governance as it is understood and practiced in the United Arab Emirates is still very much under development, however is largely in keeping with established guidelines and principles as observed in the Western world (ADCCG, 2012; Hawkamah, 2012). The emphasis is on the practical nature of corporate governance, situation governance plans and issues as a part of the corporate infrastructure and thus the means by which value is created for shareholders and other stakeholders (Hawkamah, 2012). Abu Dhabi, long the economic and political hub of the UAE, also plays a prominent role in the determination of proper corporate governance guidelines and overview, and is a center for economic and operational thinking and regulation regarding corporate governance (ADCCG, 2012).

Corporate Governance at Etisalat

In order to better understand the principles and mechanisms of corporate governance as they are practiced in the UAE at large, and examination of certain specific elements of corporate governance in one UAE company, Etisalat, will be conducted. Corporate governance begins with the Board of Directors, which in this company appears to be very loosely structured. Aside from the Chairman and the Vice Chair, all other board members are simply listed as "members," without specific titles or the duties and responsibilities that might come with them (Etisalat, 2012). As the Board of Directors is supposed to function in an oversight capacity for the executive operations of the company, the apparently loose control at the top is somewhat worrisome.

Transparency and the amount of information disclosed is also an important aspect of corporate governance, and in fact transparency is on the list of specific values listed as guiding principles for the Abu Dhabi Securities Exchange and both transparency and disclosure are included in its mission statement (ADX, 2012). Proper transparency and disclosure allows shareholders, interested members of the public, business partners, and government officials to ensure that the business is being appropriately governed, that laws are being followed, and that financial outlooks are meaningful, accurate, and complete. Etisalat provides abundant transparency, meeting the requirements of full legal compliance and then some, in its annual reports and other published documents, with a great deal of disclosure given to the public and to shareholders in order for proper appraisals of future likelihood to be made with an ongoing awareness of decisions made (Etisalat, 2012; Etisalat, 2012a).

Clear enumeration of shareholder's rights and the means provided for exercising those rights are also provided by Etisalat in their annual report, and this is one more way in which the company upholds its corporate governance responsibilities (Etisalat, 2012). The shareholders' meeting allows for a great deal of information sharing and the voicing of opinions in regards to the company's functioning, and the current annual report also demonstrates a great deal of responsiveness to shareholders and to external audits that were undertaken to provide greater shareholder assurance of transparency and of proper control (Etisalat, 2012). All of this ensures that the real owners of the company are having their best interests looked after.

The Board of Directors, shareholders, and overall transparency and disclosure are all elements of corporate governance that allow for external oversight and control, which is unquestionably an important aspect of the overall function and mechanism of corporate governance, however internal controls are also quite important. At Etisalat, standard management reviews for all regions and areas of business are conducted regularly, with the results published in the annual report, and there are many ways in which the different operational areas of the corporation are controlled for quality and consistency (Etisalat, 2012; Etisalat, 2012a). The executive team is also well established, and serves the strengthen the internal control at the company through careful delineation of executive responsibilities and areas of duty and establishing a strong hierarchy in the corporation (Etisalat, 2012).

The overall internal control of the company is important to corporate governance as a whole, and there are also specific elements of internal operations that are of key importance. Maintaining regularity in accounting methods is one essential aspects of proper corporate governance, and by using the International Financial Reporting Standards (IFRS) that most countries and companies in the world utilize, Etisalat keeps itself quite clearly in compliance in this regard (Etisalat, 2012). The company also uses the standard historical cost convention for most of its specific accounting procedures, and deviation from this calculation method are described in detail in notes accompanying their published financial information (Etisalat, 2012). This provides all the information needed for the accounting reports to be considered full and reliable.

A key element of true transparency and the maintenance not only of adequate corporate governance techniques but also the demonstrable appearance of adequate corporate governance techniques is the allowance and production of both internal and external audit reviews (ADX, 2012). Etisalat carries out such audits on a regular basis, and provides abundant details regarding the results of these reviews in its publications (Etisalat, 2012). Only minor efficiency issues and discrepancies were found as a result of these audits, according to the information presented in the annual reports, but far from making these audits seem unwarranted they affirm the fact that careful attention and the true oversight and control of proper corporate governance functions and mechanisms are capable of keeping a corporation the size of Etisalat in compliance and geared towards company objectives at all times (Etisalat, 2012).

While somewhat less powerful as a corporate governance document than the reports of internal and external audits, the Directors' report is also a significant element of transparency, disclosure, and larger corporate governance. Etisalat does not include an explicit and official Directors' report in its annual report, which is somewhat problematic, however both the Chairman of the Board and the Chief Executive Officer provide extensive statements at the top of the annual report that provide an overview of the company's successes, potential problem areas, current initiatives, and future outlooks (Etisalat, 2012). This does not fulfill entirely the same purpose as a Directors' report, but provides a great deal of insight regarding the view of the company from the top (Etisalat, 2012).

Finally, certain elements of a basic financial analysis can be carried out to determine how well the company is truly controlled and what level of value its directors and executives are attempting to create for the shareholders, and how aggressively they are going about trying to create this value. The company currently has a debt/equity ratio of just .16, which is incredibly low; this means that Etisalat is not very well leveraged and its value is somewhat diluted (Etisalat, 2012). At the same time, this means the company is highly liquid and that shareholders are all but guaranteed to receive value for their shares of ownership -- they own a great deal of assets, not a large amount of debt (Etisalat, 2012). While strategically a higher debt/equity ratio might be seen as advantageous, a low-leverage strategy is definitely worth considering for many companies and does not in itself imply a lack of corporate governance.

Financial Analysis

A more complete financial analysis of the company's financial statement from the past several years suggests that certain governance problems are a real possibility. Operating profits have dropped even faster than cash generation from operations (which has also dropped precipitously), while revenue has actually increased slightly (Etisalat, 2012; Etisalat, 2011). Liabilities and assets have both increased during this period as well, though assets have increased more substantially, and again this calls into question some of the actions of the company (Etisalat, 2012; Etisalat, 2011). The efficiency of operations and of turning assets into revenue and profit -- and thus increased value for shareholders -- appears to be questionable.

Specific Governance Issues

In addition to all of the general measures of corporate governance at a company such as Etisalat, an examination of how the company has handled certain issues of corporate governance can help determine its overall efficacy and efficiency in encountering and combating corporate governance problems. The fact that a company has faced such issues is not in and of itself and indicator of any deeper underlying problems at the company, as all corporations of size are bound to have many governance issues of at least a minor nature crop up every year. It is more in the manner of how the company recognizes and responds to corporate governance issues when they arise that provides an indicator of its corporate governance effectiveness. The brief cases provided below show some of the governance problems that indicate significant errors and breakdowns in the expected corporate governance system, and illustrate the importance of these systems as well.

Unauthorized Selling in India

Corruption and bribery are known problems in many countries, including India, and a recent case involving the unauthorized selling of telecom rights and licenses that involved the bribing of relevant public officials demonstrated an extreme breakdown of corporate governance systems (Sahota, 2012). Such sales, especially on large-scale levels, would have required the collusion of many individuals to make them appear legitimate on financial records, etc. Clearly, he companies engaged in this practice were operating with direct intention, and a roper governance system would have made this obvious and prevented it.

Software Spying

In another telecommunications case, a company was found to have included spyware in a company-sponsored "software upgrade" to users' cell phones, that enabled the company to collect confidential information from users' phones without their consent (Khaleej Times, 2009). Not only is this practice clearly unethical, but it is also illegal despite a lack of stringency in the detection of such crimes and the prosecution of large-scale corporate offenders such as telecommunications companies. Again, greater transparency and internal control would have allowed this practice to be discovered much sooner, and the risk of discovery almost certainly would have prevented this action from ever occurring. Corporate governance works best when it is so strong it is only rarely and usually accidentally tested; when purposeful actions like this take place, a fundamental problem exists.