In Kuwait, corporate governance is still in its infancy and
underdeveloped compared to its neighboring countries within the
GCC. While the other GCC countries have made considerable progress
in developing their respective country codes for corporate
governance, Kuwait is still lacking in this aspect. One survey
revealed that companies in Kuwait have the lowest standards of
corporate governance in the GCC.
Despite the above, significant initiatives are underway to improve
corporate governance in Kuwait. This includes the introduction of
the new capital markets law which establishes an independent
capital market authority. The authority is given the power and
independence to regulate and supervise the capital markets,
including implementing a full-disclosure policy to ensure fairness
and transparency and avoid conflicts of interest and exploitation
of internal information.
Corporate governance is loosely defined as the policies and
practices that affect the relationships between a company's
shareholders, board of directors (the "Board"),
management and other stakeholders with legitimate interests in a
company's performance (employees, customers, creditors, etc.).
It aims to protect the interests of stakeholders by, for example,
requiring that the board of directors be transparent, accountable
and fair in its relationship with the stakeholders.
"Good" corporate governance gives comfort to a
company's investors that their investments are being used
prudently by the management in order to enhance their value.
While noting that there are no specific regulations addressing
corporate governance in Kuwait, related laws are found in the
following:
- The Kuwait Commercial Companies Law (the "CCL");
- The rules and regulations of the Central Bank of Kuwait (the "CBK") for banks and investment companies;
- The listing rules of the Kuwait Stock Exchange (the "KSE") for listed companies; and
- The new Kuwait Capital Markets Law (the "CML").
This article focuses on corporate governance related to a joint
stock / Kuwait stock company ("KSC") and the role, duties
and liabilities of the Board.
Duties and Powers
The management of a KSC is vested with the Board. Appointed by the
shareholders, Directors have the duty to manage the company for the
benefit of the shareholders and, therefore, are accountable to
them.
Directors are required to carry out their management duties with
diligence, honesty, and reasonable care. They must disclose any
interest, direct or indirect, in any transactions or matters
potentially entered into by the company. Accordingly, Directors
cannot use their positions within a KSC to generate secret profits.
Directors may not transact or act personally in the name or on
behalf of the KSC without being authorized to do so by the Board.
They must abide by the duty of confidentiality in respect of any
information considered as such.
As a general rule, Kuwaiti law empowers the Board of Directors to
carry out all and any activities which are necessary to realize the
objectives of the KSC as outlined in its bylaws. Under the law, the
Chairman and the Vice Chairman of the Board of Directors have the
power to bind the KSC with third parties.
The Board also has a general power of management and as such is
granted extensive powers to carry out and execute the resolutions
of the shareholders and to enter into transactions which are in the
ordinary course of the KSC. The Board may appoint a managing
director(s) to undertake some of the Board's authorities or to
carry out day-to-day management. The Board may also delegate some
of its authorities and duties to third parties. Nonetheless, the
Board shall remain liable for the actions of its appointees.
Competition and Conflict of Interest
The CCL contains provisions to regulate competition and conflicts
of interest. For instance, a director may not hold directorship in
more than three companies in Kuwait or be a chairman or a managing
director for more than one company in Kuwait. Additionally, a
director may neither hold directorship or a management position in
a competing company or a company with similar activities to that of
the KSC. Any transaction in which a director has direct or indirect
interest must obtain the prior approval of the shareholders.
Remuneration
The total remuneration of the Board may not exceed 10% (ten
percent) of the KSC's net profit after deducting provisions for
depreciations and reserves and distribution of dividend of not less
than 5% (five percent) of the KSC's capital to its
shareholders. Alternatively, a maximum annual remuneration of
KD1,000 (one thousand Kuwaiti Dinar) may be made to every director
from incorporation until the company realizes profit.
Liabilities
Article 148 of the CCL states that Directors are liable to the KSC,
the shareholders and to third parties for all acts of fraud, abuse
of powers, mismanagement or any other violation of the law or the
KSC's bylaws. A vote by the shareholders' general assembly
to release the Directors from such liability will not prevent the
initiating of legal action. Thus, shareholders or third parties
would still have recourse against a Director for such acts.
There is no definition of what constitutes
"mismanagement". It is possible that Kuwaiti courts
broadly interpret the term in order to cover a wide range of
behaviors. This would grant shareholders and third parties the
right to claim damages from Directors for many kinds of acts or
errors in their management of the KSC, whether or not committed in
bad faith.
A Director may avoid liability by objecting to resolutions passed
by the Board which had approved the acts falling under Article 148
of the CCL. The Director's objection must be proved through the
minutes of the meetings. Otherwise, the objecting Director would
still be held jointly liable with the other Directors.
Specific Requirements for Directors of Banks and Investment
Companies
Directors and key officers of banks and investment companies are
required to have adequate experience in banking or in the financial
sector. They are also held to a high moral and ethical standard.
The specific qualifications required for a bank director is
provided under Central Bank Regulation No. 4/220 of 1995.
In addition, bank directors are subject to additional disclosure
requirements and responsibilities provided under Law No. 32 of 1968
(Central Bank Law) and the associated implementing regulations. The
CBK has the power to carry out at any time audits and inspections
of banks and investment companies under its supervision. The
Central Bank Law provides that bank directors are liable for
failing to produce information or documents required by the CBK for
its audits or for knowingly submitting incorrect information and
may be fined or imprisoned.
The penalties provided under the Central Bank Law may be imposed
not only on the executive officers and managing directors of the
banks, but also on other Directors in the event they knowingly
agreed or acquiesced to the commission of the prohibited
acts.
Specific Requirements for Directors of Listed
Companies
Listed KSCs are subject to the disclosure obligations and reporting
requirements of the KSE and are particularly obliged to comply with
Law No. 2 of 1999 (Regarding the Disclosure of Interests in Joint
Stock Companies) and Decision No. 5 of 1999 of the Kuwait Stock
Exchange Committee (Regularizing Disclosure of Interests in Joint
Stock Companies) which require the KSC to submit to the KSE a
statement of shares or securities owned by its Directors in such
KSCs within one month of the Directors' respective appointments
or the effective date of dealing with their shares or securities in
the KSE.
With the passing of the new CML, which contains disclosure
provisions, most of the former disclosure requirements have now
been superseded. Of relevance, Directors of a listed KSC and their
first degree family members or spouses must now disclose their
interests in the listed KSC (regardless of the percentage) to the
Capital Markets Authority, the relevant bourse and the listed KSC,
and any changes thereto, in securities of the company where the
director works, their subsidiaries and associated companies. This
disclosure obligation extends to any rights granted to the Director
on any exercise of options.
The Capital Markets Authority has recently been established, but
the regulations of the CML have yet to be developed. Therefore,
there remain uncertainties as to the implementation of this
disclosure obligation.
Conclusion
While the corporate governance framework in Kuwait is still
scattered and not uniformly and comprehensively codified, the laws
generally cover the basic elements relating to the accountability
and transparency of the Board in a KSC. However, such basic
framework is still insufficient to ensure the highest standards of
corporate governance. Therefore, Kuwait must "catch up"
with its GCC neighbors which have made progress in developing their
respective country codes addressing corporate governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.