Corporate Governance at Etisalat and the UAE

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, yet it is largely in keeping with established guidelines and principles observed in the Western world (ADCCG, 2012; Hawkamah, 2012). The emphasis is on the practical nature of corporate governance — situating governance plans and issues as part of the corporate infrastructure and thus as 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 determining proper corporate governance guidelines, and serves as a center for economic and operational thinking and regulation in this area (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, an examination of specific elements of corporate governance at one UAE company — Etisalat — will be conducted. Corporate governance begins with the Board of Directors, which at 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, this apparently loose control at the top is somewhat worrisome.

Transparency and the amount of information disclosed are also important aspects of corporate governance. Transparency is explicitly listed among the guiding principles of the Abu Dhabi Securities Exchange, and both transparency and disclosure are included in its mission statement (ADX, 2012). Proper transparency and disclosure allow 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 so that proper appraisals of future likelihood can be made with an ongoing awareness of corporate decisions (Etisalat, 2012; Etisalat, 2012a).

A clear enumeration of shareholders' rights and the means provided for exercising those rights are also included in Etisalat's annual report, representing 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 regarding the company's functioning, and the current annual report also demonstrates a high degree of responsiveness to shareholders and to external audits undertaken to provide greater shareholder assurance of transparency and proper control (Etisalat, 2012). All of this helps ensure that the real owners of the company have their best interests looked after.

The Board of Directors, shareholders, and overall transparency and disclosure all enable external oversight and control — unquestionably important aspects of corporate governance. However, internal controls are equally important. At Etisalat, standard management reviews for all regions and areas of business are conducted regularly, with results published in the annual report, and there are many ways in which the different operational areas of the corporation are monitored for quality and consistency (Etisalat, 2012; Etisalat, 2012a). The executive team is also well established and serves to strengthen internal control through careful delineation of executive responsibilities and areas of duty, establishing a strong hierarchy within the corporation (Etisalat, 2012).

Maintaining regularity in accounting methods is one essential aspect of proper corporate governance. By adhering to the International Financial Reporting Standards (IFRS) that most countries and companies in the world utilize, Etisalat keeps itself 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 any deviations from this method are described in detail in notes accompanying the 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 of maintaining not only adequate corporate governance techniques but also the demonstrable appearance of such — 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. Far from making these audits seem unwarranted, however, these findings affirm that careful attention and the true oversight of proper corporate governance are capable of keeping a corporation the size of Etisalat in compliance and geared toward 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 broader 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 offer 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 it does provide a great deal of insight into the company's direction as seen from the top (Etisalat, 2012).

Certain elements of a basic financial analysis can also be used to determine how well the company is truly controlled and what level of value its directors and executives are attempting to create for shareholders. The company currently carries a debt/equity ratio of just .16, which is remarkably low. This means that Etisalat is not very highly leveraged and that 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 ownership stakes — they hold a claim on a substantial asset base rather than on a large amount of debt (Etisalat, 2012). While strategically a higher debt/equity ratio might be seen as advantageous, a low-leverage strategy is 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 statements 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 fallen 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 grown more substantially, and this too calls into question some of the company's strategic decisions (Etisalat, 2012; Etisalat, 2011). The efficiency of operations and the ability to convert assets into revenue and profit — and thus into increased value for shareholders — appears questionable.