OBG talks to Alex Saleh, Partner, Al Tamimi & Co.

Interview: Alex Saleh

How can the recently enacted corporate governance laws help Kuwait attract investors?

ALEX SALEH: The recent focus on corporate governance practices in Kuwait will help domestic companies to gain a competitive advantage in the global economy, especially through attracting investors. Broadly speaking, investors base their decisions on their understanding of a company’s strategy, performance and potential to create long-term value. Establishing a valuation framework by instituting a sound corporate governance system is a key strategy for companies wishing to attract investors. The regulatory framework for corporate governance is underpinned by several statutory provisions, such as the New Companies Law (NCL), the law governing the Capital Markets Authority (CMA), which regulates the securities market and certain other entities, and specific internal instructions issued by the CMA.

Which statutes are key to the NCL?

SALEH: Most notable are the numerous compulsory disclosure, reporting and auditing requirements the NCL places on companies. From a purely legal perspective these requirements mitigate risks a company could potentially face, but from a investor perspective, access to accurate and timely public information allows investors to make informed decisions on their investments. For example, under the NCL a public shareholding company must form an internal audit committee. This encourages good corporate governance practice.

The committee fosters the culture of compliance within the company and ensures the integrity and soundness of its financial reports. In an effort to ensure the efficiency and effectiveness of the internal control system, at least one of the members of the audit committee must be an independent member.

Moreover, the body may seek the advice of one or more external auditors at the company’s expense. The independent external auditor may not have an interest in the company during the auditing period or perform any work in the capacity of a consultant. Further, the auditor is entitled to obtain all company records, registers and documents necessary to perform any required duties. Additionally, they have a duty to the company to produce a detailed report, which includes balance sheets, profit and loss, and actual financial reports; to audit the regular accounts of the company; to audit the inventory; to confirm that the details of the board of director’s reports conform to company records; and report any substantial violations to the general assembly and the CMA.

The clear objective of having an independent auditor is to encourage companies to adopt practices of transparency and accountability, which, in turn, increases the rate of trust and confidence of investors.

As the economy diversifies, what has Kuwait done to ensure a suitable framework for investment?

SALEH: Kuwait has taken steps to attract both foreign and domestic investors by introducing measures to regulate the securities market – particularly the statutory provisions that appoint the CMA as the body regulating the securities market. The CMA’s mission is sixfold: to organise the securities market so that it adheres to the tenets of impartiality, competency, competitiveness, and transparency; to encourage the development of the securities market; to protect investors; to minimise risks; to apply full disclosure policies and prevent conflicts of interest; and to comply with the law.

The CMA also has the authority to enforce civil and criminal actions against companies and individuals who violate the law. Illegal insider trading practices, for example, have plagued the global economy. In response, Kuwait enacted specific regulations on such practices. Under the current law, a member of the board of directors is prohibited from trading in the issuer’s securities – whether by buying or selling – during his directorship in the company, except under certain limited cases, such as through the transfer of share ownership by inheritance or will. The underlying objective of the CMA is to protect the integrity of the securities market.