The Oman Commercial Companies Law mandated the Capital Market Authority to issue regulations for the governance of companies in which the Government owns shares. In this article we examine the draft regulations published by the Capital Market Authority setting out principles of Corporate Governance for State Owned Enterprises, which aim to set a new benchmark for governance and operations of these entities.
Pursuant to Section 20 of the Commercial Companies Law the Oman Capital Market Authority (CMA) has issued Draft Corporate Governance Principles for State Owned Enterprises (Draft Code). Feedback from interested parties is requested by 13 May 2020.
The Draft Code sets out a corporate governance regime for qualifying unlisted companies, State General Reserve Funds and pension funds in which the Government has direct ownership regardless of legal form. This includes closed joint stock companies and limited liability companies. It will not apply to public joint stock companies with Government ownership which will continue to be subject to the CMA's existing Code of Corporate Governance (CCG).
The Draft Code's provisions encompass:
Characteristics of State Owned Enterprises – State Owned Enterprises are prima facie commercial companies with the aim of eventual privatisation, subject to all laws governing commercial companies in the Sultanate – Qualifying State Owned Enterprises (SOEs) must have a defined purpose and a time or economic criteria by which they must aim to be privatised. New, for-profit SOEs formed after the regulations come into effect must be established as public joint stock companies. Such entities would not be subject to the provisions of the Draft Code.
Fair competition – The Draft Code looks to SOEs to compete transparently in the free market. It provides that SOEs shall operate without favourable treatment or special protection on equal footing with private companies 'to ensure fair competition in the interest of the national economy'.
A commercial approach to Government share ownership, robust separation of Government and management and equitable treatment of other shareholders – The Government should act like a private sector owner and not as sovereign, with a clear and consistent vision with regard to its ownership. The Government should not interfere in the day-to day management of the SOE and should rely on the exercise of its rights through voting at shareholder meetings and/or meetings of the board of directors to protect its interests. The Government and the SOE should ensure equitable treatment of other shareholders.
A corporate governance regime applying internal controls and reporting requirements similar to the Code of Corporate Governance for public joint stock companies (CCG) – The Draft Code would bring significantly greater transparency to the operations of unlisted SOEs. It draws heavily on the CCG in this regard, applying a substantially similar regime in many areas, with some additions and modifications. The requirements include:
- Publication of annual and quarterly financial statements and an annual report on compliance with the code;
- Boards comprised of non-executive directors and no less than one-third independent directors (and a minimum of two independent directors). No more than half the board seats may be allocated to Government officials. There is a new requirement for directors to be certified in company directorship, governance and sustainability by an authorised and accredited body;
- Mandatory audit and risk management and nomination and remuneration committees;
- A review of board performance once every term;
- A code of professional conduct;
- Rules governing related party transactions; and
- A Corporate Social Responsibility (CSR) policy and annual CSR report.
The Draft Code sets out an ambitious and comprehensive framework for governance which would bring about significant change on implementation. It remains to be seen to what extent it will be amended following consultation. We have set out further analysis of its provisions and commentary below.
Application of the Draft Code
The Draft Code sets out two criteria either or both of which may be considered to determine whether the code will apply to an entity in which the Government owns shares. The criteria are centred on:
- The extent of influence and control of the Government over the entity tested in accordance with International Financial Standards; and
- The extent of the Government's shareholding and potential for obtaining preferential treatment from suppliers, banks or in tenders.
The criteria are quite broad and subject to subjective interpretation, however in practice there are likely to be few cases of unlisted SOEs where the application of the code would fall into question. In the event that question does arise the CMA alone to have competence to construe the code and would be the final arbiter.
The Draft Code does not apply to public joint stock companies in which the Government owns shares, although such entities will be subject to the CCG.
Statement of Purpose and Aim for Privatisation
Every SOE must have a time or economic criteria for privatisation of the Government's share and a publicly accessible 'Statement of Purpose'. If that purpose is not achieved or is changed, dissolution or merger must be considered.
The Draft Code provides that when the Government establishes a new SOE:
- Which has strategic or not-for-profit goals - the Government must privatise or dissolve the company once its inception goals are achieved.
- Which is established for profit in the medium or long term - it must be a public joint stock company. A controlling share of the Government must be reduced to no more that 5 per cent. in 10 years. As public joint stock companies such entities would not be subject to the Draft Code.
Fair Competition
A key theme of the Draft Code is the requirement for SOEs to compete on an equal footing with private companies and without favourable treatment or special protection. Conversely the Draft Code confirms that the obligations of an SOE are not guaranteed by the Government in the absence of an express guarantee.
Exercise of Government Ownership Rights and Equitable Treatment of Other Shareholders
The Government is expected to act as a private owner with a clear and consistent vision as to its ownership and not to act in an administrative, regulatory or sovereign capacity. The Government should not interfere in the day-to-day management of the SOE or the appointment of an employee It should rely on the exercise of its rights through voting at shareholder meetings and/or meetings of the board of directors to protect its interests.
The principle of equitable treatment for non-Government shareholders requires the SOE to ensure the articles and governance systems reflect their rights and how to protect them and the Draft Code sets out detail of the minimum requirements in this regard. Unlike under the CCG though, there is no mandatory requirement for approval of extraordinary or non-ordinary course related party transactions in general meeting by shareholders other than the related party.
Allocation of Government Voting Interests
The Draft Code provides that the Ministry of Finance will specify no less than five related Government entities that have influence or are influenced by the operations of the SOE, to represent the Government's share of votes at general meetings. Votes are to be divided equally amongst these entities or as determined by the board of directors in accordance with the degree of influence over, or being influenced by the SOE's business. It is unclear whether the intention is that this provision applies in all cases or only where the Government interest is 50% or more. The initial quorum for a general meeting is shareholders representing half the share capital, provided at least half the Government's shares are present.
Financial and Governance Reporting Requirements
The Draft Code would bring significant transparency to the operations of SOEs. It provides for SOEs to publish on its website and through the CMA portal:
- Annual audited and quarterly unaudited financial reports.
- An audited corporate governance compliance report which, in addition to including details of board composition and board and executive remuneration, must provide details of the financial burden of providing non-economic services mandated by the Government.
- In addition an annual CSR report must be included in the annual report.
Corporate Governance – Constitution and Responsibilities of the Board, Internal Controls and Policies
The Draft Code incorporates many of the requirements set out in the Code of Corporate Governance for public joint stock companies (CCG) with some modifications, including provisions requiring:
- A board of non-executive directors with the composition requirements described above. Independent directors must not be on more than three boards.
- Mandatory audit and risk management and nomination and remuneration committees with written terms of reference.
- Competitive executive remuneration and incentive structures on a par with the private sector, subject to certain conditions.
- Adoption of a Code of Professional Conduct.
- Disclosure of related party transactions. The requirements differ from the CCG regime, in particular there is no requirement for extraordinary or non-ordinary course related party transactions to be approved in general meeting. The Draft Code also introduces specific provisions requiring the SOE to establish policies governing the relationship with stakeholders, including related Government entities, local municipalities and communities. The SOE must disclose rights or benefits granted to stakeholders 'which may affect the soundness of decision making of the SOE'.
- A Corporate Social Responsibility policy is to be adopted by the board, accompanied by an annual CSR report. There is a requirement to engage an independent social responsibility institution in connection with CSR. The Draft Code also incorporates some environmental responsibilities.
